Blog

How decisions made under uncertainty can cast a long shadow - Internet Pricing

The reality of having to make decisions under uncertainty is that quite often, you'll get things wrong. Unfortunately, sometimes those wrong things have very long and path-dependent consequences. I'm thinking in particular of two decisions that were made virtually industry-wide as the Internet evolved: 1) the decisions that content should be 'free'; and 2) the decision to sell Internet access on a flat-fee for unlimited access basis. As a recent article in the Wall Street Journal points out, in the early days of the Internet (remember dial-up access?) consumers were perfectly happy to pay by the amount of connection time they used. If you cast your mind back to the old AOL business model, you paid a basic access fee to get your ID and password, and that covered a certain amount of usage. Then, if you went over that, you paid more. This kind of pricing makes a lot of sense when you have a resource that is vulnerable to overuse, and you want to encourage investment in the infrastructure to support it. Then, along came a bunch of bright sparks with the idea of offering 'always on' unlimited access to the Internet at high-speeds for a fixed, flat rate. I'm sure the original idea was to try to undermine the AOL model both in terms of speed and in terms of ease of use. What was apparently not anticipated was that the amount of traffic that would eventually begin flowing through the networks as our lives become increasingly digital and on-line. Now, those who offer network services are in a pickle: How do you backtrack on that business model, once you have trained customers that your services should essentially be available in unlimited quantities for one flat price? I think it's rather analogous to the problem news organizations and content providers are up against as well – how do you convince people to pay for content after spending over a decade providing the news for free? There are a few examples in which companies have been able to get customers to pay for something they used to get for free – cable TV and (to some extent) Satellite radio might be cases in point. But it isn't easy, and requires some kind of barrier to competition. It will be interesting to see how the net neutrality legislation now making its way through the legislature will play into this. While I do agee that you don't want network provides making decisions about which services customers can and can't get, it doesn't seem to honor basic fairness to me to dictate that they have to offer their services to any comer on an unlimited basis. After all, nobody is telling the electricity company that they can't charge more to those who use more. And in telephony, interestingly enough, the operators seem to have avoided the seduction of giving their network minutes away for free. We have a strong interest in making sure that networks are capable of handling the traffic of the Internet future. And someone has to pay for that. Let's hope that some reasonable compromise can emerge, in which network providers have an incentive to provide great service, while charging fair prices for the access they provide.